Vero Liability Insurance Ltd v Heartland Bank Ltd (Formerly Marac Finance Ltd)

• Jurisdiction: New Zealand
• Judge: Randerson J
• Judgment Date: 07 July 2015
• Neutral Citation: [2015] NZCA 288
• Docket Number: CA712/2013
• Court: Court of Appeal
• Date: 07 July 2015

BETWEEN

Vero Liability Insurance Limited

Appellant

and

Heartland Bank Limited (Formerly Marac Finance Limited)

Respondent

[2015] NZCA 288

Court:

Randerson, Stevens and White JJ

CA712/2013

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court finding that the appellant insurer was liable to indemnify the respondent under an insurance policy providing cover for dishonesty by employees — employee made unauthorised and undisclosed advances of credit to a customer — employee did not profit from the transactions or set out to deceive the respondent but had chosen to conceal his activities to avoid discovery of the lending and to prevent his likely dismissal as a consequence of it — whether the employee had acted dishonestly — whether there had been intent to cause loss to the respondent — whether the rule in Clayton's case applied when calculating loss — whether the respondent had suffered direct financial loss as a consequence of the dishonesty during the period covered by the policy.

Counsel:

C T Walker for Appellant

R J Hollyman and T P Mullins for Respondent

• A The appeal is allowed and the cross-appeal is dismissed. The High Court judgments on liability and quantum are set aside.

• B The order for costs against the appellant in the High Court is set aside save that the order requiring the appellant to pay Mr Jordan's costs is undisturbed.

• C The respondent must pay the appellant costs for a standard appeal on a band A basis with usual disbursements.

• D Costs in the High Court are to be decided by that Court.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Randerson J)

Table of Contents

	Para No
Introduction	[1]
Background facts	[9]
Rapson's funding from Allied Finance	[9]
Daewoo's collapse	[10]
Mr Atkinson becomes involved	[11]
Proposals to recover the Rapson debt	[12]
Proposals discussed at the Credit Committee meeting on	[15]
7 April 2003
CBC's change of plan	[21]
The Credit Committee meeting of 13 May 2003	[22]
Subsequent events up to January 2004	[23]
Establishing the 464768 account	[29]
Lending under the 464768 account	[31]
Matters come to light	[37]
Did Mr Atkinson act dishonestly?	[39]
The Judge's finding	[39]
Did MARAC know about the 464768 account?	[44]
Discussion	[51]
Did Mr Atkinson act with the clear intent of causing loss to MARAC?	[67]
The meaning of “clear intent”	[67]
The Judge's conclusions on the issue of intent to cause loss	[71]
Our conclusions on the issue of intent to cause loss	[83]
Proof of loss	[85]
The second judgment (quantum)	[94]
Conclusions	[99]
Costs issues	[105]
Disposition	[118]

Introduction

1 The issue in this appeal is whether the appellant Vero is liable to indemnify the respondent MARAC under an insurance policy providing cover for dishonesty by employees. 1 In the High Court, Courtney J found that Vero was liable. 2 In a second

judgment, she fixed the quantum of the loss at the maximum available cover of $1 million. 3

2 MARAC provided finance facilities to Rapson Holdings Ltd (Rapson), a distributor of motor vehicles imported from Korea. Rapson encountered financial difficulties in 2001. In the following year, MARAC appointed one of its senior executives, Mr Grant Atkinson, to take responsibility for managing Rapson's account. Rapson continued to trade with MARAC's support but, in early 2010, MARAC claimed to have discovered for the first time that Mr Atkinson had approved unauthorised advances and provided letters of credit to Rapson under a new account. This was referred to in the evidence as the 464768 account. MARAC alleged that Mr Atkinson had exceeded his delegated authority in approving the advances and the letters of credit and that he had been dishonest in failing to disclose this to MARAC's Credit Committee or its Board of Directors.

3 By the time MARAC claimed to have discovered what had happened, Rapson was insolvent and had been for some time. It was placed in liquidation in 2010. In the meantime, MARAC made a claim on the insurance policy in February 2010. This provided cover for acts of dishonesty committed during a period of four years prior to discovery of the loss. It is common ground that this period commenced on 8 February 2006. MARAC claimed that losses in excess of the maximum cover of $1 million were sustained during the period from 8 February 2006 to 8 February 2010.

4 The operative clause of the policy relevantly provided:

The Insurer shall indemnify the Insured for their direct financial Loss

sustained at any time consequent upon a single act or series of related acts of

… dishonesty … committed by any Employee … which is:

• (i) Committed with the clear intent to cause the Insured a Loss, and

• (ii) Discovered by the Insured during the Policy Period …

5 On appeal, Vero challenges the Judge's findings that Mr Atkinson had committed acts of dishonesty and that he had done so with the clear intent to cause

MARAC loss. An unusual feature of the case is that there is no evidence that Mr Atkinson obtained any financial advantage from his conduct other than the benefits associated with his continued employment with MARAC. Rather, the Judge concluded that he was very likely motivated from 2005 onwards to avoid discovery of the lending and to prevent his likely dismissal in consequence. 4

6 Vero also challenges the Judge's finding that MARAC had proved it had sustained a loss as a result of Mr Atkinson's dishonest acts. The experts who gave evidence about quantum were agreed that the payments received from Rapson in the four year period exceeded the sums advanced. The Judge's finding that loss was proved depended on her acceptance of MARAC's submission that the rule in Clayton's Case applied and that this was the way MARAC dealt with the payments in practice. 5 This meant that payments received during the four year period were to be applied to the earliest outstanding advances, including those made prior to the commencement of the four year period. On this approach, advances made during the four year period and not repaid amounted to a sum in excess of the available indemnity.

7 MARAC has cross-appealed on costs issues and also seeks to support the judgment in the High Court on other grounds.

8 The main issues to determine are whether the Judge erred in:

• (a) Finding Mr Atkinson acted dishonestly.

• (b) Finding he had acted with the clear intent to cause loss to MARAC.

• (c) Finding that MARAC had proved a loss of not less than $1 million.

• (d) Making the costs awards.

Background facts

Rapson's funding from Allied Finance

9 The general narrative is not in dispute and is drawn substantially from the Judge's more detailed summary. 6 Rapson was the New Zealand distributor of Daewoo and Ssangyong motor vehicles. Both Rapson and its retail subsidiary, CBC Ltd, were funded through a $7.5 million Dealer Floorplan facility established in 2000 with Allied Finance, which subsequently merged with MARAC. Floorplan lending is a revolving credit facility under which the motor vehicle dealer draws down money to purchase new vehicles and repays it from the proceeds of sales. The facility has a fixed limit. Security is provided by way of a charge over assets through a debenture or general security agreement together with guarantees and other collateral security. MARAC's internal stock auditors are required to visit dealers every few weeks to ensure that the stock of motor vehicles held is adequate to secure the amount advanced.

Daewoo's collapse

10 Soon after the Floorplan facility was established, Daewoo suffered a financial collapse which posed a real threat to Rapson's viability. Daewoo's collapse revealed serious lapses by MARAC staff in properly documenting and managing the Rapson facility. Reports in 2001 noted that Rapson was effectively insolvent. CBC was also to become insolvent and was wound up in 2003. The focus in 2001 was on trying to recoup the debt, which stood at $6.87 million on 31 December 2001. No payments had been made since that time in reducing the debt. The Board and MARAC's Credit Committee were concerned about the level of the Rapson debt. 7 As the Judge found, MARAC's ongoing concern was centred on recovery of the Floorplan debt and avoiding further exposure for MARAC. 8

Mr Atkinson becomes involved

11 At a meeting on 1 March 2002 attended by the chair of MARAC's Credit Committee Mr Brian Jolliffe, it was decided that the Rapson account would in future be managed by Mr Jolliffe and Mr Atkinson with the assistance of another staff member. 9 Mr Jolliffe had some 30 years banking experience. He was MARAC's CEO from mid-2000 to April 2009 and its managing director from July 2005 to June 2009. Mr Atkinson had been an advances manager with the company since 1996 and was highly regarded. In early 2002 he had been promoted to General Manager — Group Credit. The Judge found that, in reality, Mr Atkinson would take the major role in managing the Rapson account. 10 She added that, with hindsight, it seemed likely he lacked some of the operational skills required to effectively take on that task.

Proposals to recover the Rapson debt

12 Over the ensuing months a number of proposals were discussed by the Credit Committee, the MARAC Board and Rapson's managing director Mr Russell Burling. During this period there were ongoing negotiations between General Motors and Daewoo with a view to the former taking over Daewoo or some other form of financial restructuring. The realistic options at this point were for Rapson to continue to trade pending the outcome of the negotiations or to be placed in receivership. Mr Jolliffe recommended the former and proposed that MARAC pursue the option of funding the importation of...